Fields that exhibit tournaments with asymmetric and convex payouts favor high-variance strategies (variance from the benchmark mean).
For example, fund managers that end up on the Morningstar list (top fund managers) tend to be founder-managed funds with highly concentrated positions (they also underperform in later periods). High variance from an index benchmark is favorable because if you make it to the top fund manager list you will receive many more clients and make a lot on fields.
Another example is baseball where, before Babe Ruth, the prevailing strategy was high-contact (hitting many singles). Babe Ruth showed a high-variance strategy by swinging for the fences every time. His failure rate was much higher (he led the league in strikeouts), but he also overwhelmingly led the league in home runs making him one of the most valuable players in the league. (A corollary in recent times is the rise of three pointers in basketball).
Other fields that exhibit this incentive for high-variance strategies include politics (making outrageous statements until something stick has little downside these days) and venture capital (losses are capped, but gains are not).
Read Swinging for the Fences.
- Warren Buffet talks about the lollapalooza effect as what you are looking for as an investor (outsized gains from the culmination of several factors acting in concert)
- While fund managers seeking large gains use highly concentrated positions, something similar can be said about product development—a cathedral for creation a bazaar for growth
- The Economics of Superstars also describes this phenomenon (but more mathematically)
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A country with a frontier is shaped by it. It favors people with rugged individualism because common services are not readily available without an existing economy in place. Positive-sum interactions in settled areas are required because people always have the option to leave. Finally, people seeking high variance opportunities will follow the frontier in search of outsized gains.
Markets exhibit the Pareto principle in that most of the advantages accrue to a small number of players—mostly number one. These advantages include growing faster, network effects, recruiting the best people, expanding to new opportunities quickly and most of the 7 Powers.
One question I find myself coming back to is whether or not macroeconomics is a useful source of explanations.
While government tends to be short-term oriented (the election cycle drives decisions so officials can be re-elected), an area the do feel comfortable thinking long term is infrastructure. With regularity, they will initiate projects to build roads, telecommunications, buildings, and other infrastructure that takes many years to build (the second avenue subway line in Manhattan started in 1972).
There are two common elements of economic superstars. First, there is a close connection between personal reward and size of the market. Second, there is a tendency for market size and reward to be skewed to the most talented people in the field.
Private investment firms like venture capital and private equity are in the business of avoiding visible volatility of public markets. Because private assets don’t trade and investment managers go to great lengths to keep them from going down, assets appear to mostly appreciate (there are down rounds and losses, sometimes the chicken comes home to roost, but for the most part this is true) even when public markets are tanking.
In discussing market changes, Howard Marks, remarks that psychology overwhelms fundamentals in the short run as the reason why markets can appear irrational. This is a neat way of holding both the idea that investors are rational and markets are irrational simultaneously.